September 30, 2013
by RP Data senior research analyst, Cameron Kusher
Capital city home values have increased by 5.3% over the 12 months to August 2013 however, unit values have risen by just 3.2% compared to a 5.6% increase in house values.
Units offer a more affordable price point at which to enter the housing market. Not only are they more affordable, they are often most abundant within inner city areas where many people aspire to live and from an investment perspective they tend to offer better rental returns. The popularity of unit development is also rising as developers look to cater to growing housing demand. It is quite possible that with interest rates at such low levels buyers are focussing on more expensive detached houses and may be overlooking the unit market.
Over the 10 years to August 2013, combined capital city house values have increased at an average annual rate of 4.4% compared to 3.7% for units. Over the past five years, unit value growth has actually outperformed that of houses, with house values increasing at an average annual rate of 2.9% compared to 3.4% for units. Despite the superior growth in unit values, they still offer a much more affordable purchase price than detached houses.
From an investment perspective, the typical gross rental yield on a capital city unit is recorded at 4.8% currently, compared to 4.1% for capital city houses. Of course, inner city units typically offer gross rental yields which are much higher than this city-wide benchmark.
It isn’t just home values which are indicating a rising popularity for units, it is also being reflected in dwelling approvals data. Over the 12 months to July 2013, there were 66,185 units approved for construction across the country. Unit approvals accounted for a near record high 41.5% of all dwelling approvals over the year. To put this figure in perspective, 10 years ago 34.4% of all dwelling approvals were for units and 20 years ago it was 29.0%. Clearly over the coming years, we are likely to see more and more medium and high density residential product delivered to the market, most of which will be in central areas of our capital cities.
Most people probably still hold the aspiration to own their own detached house however, the rising cost of housing and an ongoing insufficient supply of infrastructure in many parts of suburbia suggests that we may have to become more accepting of higher density product. With units in most cases being much more affordable than houses it does mean that residents can live in those aspirational suburbs without the price tag associated with a detached house.
Focussing on the suburbs across the capital cities with the greatest gap between house and unit values highlights the large differential. For example, in Centennial Park in Sydney, median house values are 10 times greater than median house values.While a house may cost millions in many inner city suburbs, a unit offers the purchaser an opportunity to live in the suburb and enjoy all of these benefits. These benefits can in most cases be enjoyed with a six-figure price tag rather than the seven-figure price tag across many of the highly desirable inner city detached housing markets.
Overall, we are seeing the capital growth performance of units and houses becoming more aligned and we are seeing a rising proportion of new dwelling approvals for units. The growing supply of new units is clearly being driven by demand. Demand for people to be able to live in desirable inner city suburbs at a price point, from either a rental or ownership perspective, which is more achievable than the cost of a detached house in these areas. Given this, we anticipate that over the coming years, demand for units in the inner city will continue to rise. From an investment perspective with home value growth likely to track lower than it has in the past, we believe investors will have to pay closer attention to the total returns. This means not just the capital growth potential but also the rental return. Although units have historically not appreciated in value as quickly as houses they typically enjoy a superior rental return and may as a result be a superior investment choice